Company Overview: Bubs Australia Limited (ASX: BUB), formerly known as Hillcrest Litigation Services Limited, is an infant baby food company, engaged to produce a wide range of infant food products under the BUBS brand in Australia and internationally. Founded in 2006, the company is headquartered in Frenchs Forest, Australia and the group is being currently headed by Ms. Kristy-Lee Newland Carr – Founder, CEO & Executive Director. It offers organic baby food, milk formulas, cereals, and other nutritional products for children. The award-winning range includes first and second stage fruit and vegetable purees, protein meals, cereals, and healthy toddler snacks. It also produces BUBS ADVANCED PLUS+ Goat Milk formula, which is made in Australia and available in 3-stages from infant to toddler. The products of the company are now sold in country- wide in over a thousand retail outlets, including major and independent supermarkets, department stores, organic and health food stores and pharmacies. The products are also sold on leading Chinese cross?border e?commerce platforms including JD.com, Tmall Global, VIP and Kaola.com, and are exported to South?East Asian and Middle East markets, including Singapore, Hong Kong, and the United Arab Emirates.


BUB Details

Efficient Business Model:  Bubs Australia Limited (ASX: BUB) has an asset?light flexible production business model that allows it to outsource supply and manufacturing to key partners whose expertise and facilities, management believes, is “best in class”. The brand value, formulations, recipes, specifications and other intellectual property relating to the products allow Bubs to generate revenues from the sale of those products.  Its key strength is managing the complex relationships between suppliers, manufacturers, distributors, and consumers. The targeted customers of the company are children. Moreover, its senior management team is well skilled to identify demand trends for new infant food and products, sourcing appropriately certified raw materials and ingredients, ensuring that partners in the manufacturing and packaging sector produce to exacting specifications, and then selling those products through the appropriate distribution channels to satisfy consumer demand. The company’s products remain to be market leading ones. Hence, we trust the management’s ability to address growth opportunities ahead backed by its efficient business model.


Four Key Pillars strengthen the growth strategy (Source: Company Reports)

Synergistic Agreements for overall growth: Tie-up with New Times Asia, NuLac Foods Ltd, Alibaba Group, and Australia Deloraine Dairy Pty Ltd will help to increase the topline growth of the company in years to come on the back of revenue sharing agreement, an easy arrangement to get goat milk to fulfill the consumer demand, expanding footprint across the market, etc.

(a) Strategic Agreement with New Times Asia: The Company has signed a long-term supply agreement with New Times Asia with total sales commitment for purchase orders valued at $17 million in FY19 and increasing to $24 million in FY20, and $37 million in FY21. The agreement with New Times Asia is a major step forward in its China expansion strategy and shows the investment that it has been making and continues to make in building its China presence is bearing fruit. Based on its annualized run rate of Bubs and CapriLac combined trading, the committed FY19 offtake by New Times Asia will be at least double of its total company net sales revenue.

(b) Lucrative Acquisition of NuLac Foods: The group acquired 100% NuLac Foods Ltd and became the only vertically integrated producer of goat milk infant formula in Australia. Following the aforesaid acquisition, the group is now having exclusive access to 13 million litres of goat milk from its Australian and New Zealand farms which is double that of just six months ago. This milk pool will be smoothing the long-term supply which is very important for both Australian and Chinese consumers.

(c) Collaboration with Alibaba: The group has recently signed a deal with Chinese e-commerce giant Alibaba Group through which the baby food maker is launching a flagship store. The platform will sell Bubs' entire range of formula i.e., infant formula, organic baby food, cereals and snacks to Chinese consumers thereby expanding its presence in the China market where demand for such products is growing. In relation to this, the company is expecting to generate RMB 5 Mn (~A$ 1 Mn) in the first 12 months of trading.

(d) Partnership with Australia Deloraine Dairy Pty Ltd: The group has entered into a binding manufacturing agreement with Australia Deloraine Dairy Pty Ltd for CFDA registration with the objective of achieving CFDA registration and enabling the group to advance its China expansion strategy for physical export of Bubs Chinese labelled infant formula products into Mother and Baby stores in China.

(e) Deal with Hipac: The group has bagged a deal with Chinese mother and baby products distributor, Hipac to further expand its footprint in China to supply products across 83,000 additional stores.

Expanding Partner Base at a Global level: Bubs has plans to scale up its business through expanding its footprint across the globe via a partnership with infant nutrition providers. Following this, throughout the year, the company focused on expanding key points of domestic distribution, including securing new ranges across its product portfolios in Woolworths, Costco, Aldi, Metcash, Chemist Warehouse and other leading pharmacy banners, as well as increasing store counts in longstanding retail partners Coles and Big W. Further, the company’s domestic sale is strong in view of the new range of Bubs infant formula and cereals in Woolworths, and Bubs infant formula sales grew by 21.2% in Coles, which is the fastest growing brand in value over the last 26 weeks versus last year (Source: Nielsen Scan Sales Data as at 17 July 2018). On geographic front, China export sales grew by 305% in FY18 over the prior year while Domestic sales increased by 325% on pcp basis. Hence, we expect that the diversity of Bubs’ customer base will support to mitigate the financial risks in the event of a delisting by any particular distributor, as well as, it will provide the benefit from margin accretive opportunities available outside Australia. Moreover, existing partnerships will assist Bubs to increase market penetration.
 

Segmental Performance (Source: Company Reports)

New Product to drive the Growth: The company experienced good traction to generate sales from its newly launched product such as Bubs Advanced Plus+ Goat Milk. Moreover, the company will continue to expand its share of the infant category through innovation and product development, ensuring to drive growth in higher value product segments. Additionally, BUBS will continue to develop infant and toddler products for every stage of a baby’s development, ensuring the business is commercially agile to identify and exploit new opportunities in the industry which will help to drive topline growth in the upcoming period.

 

Product Innovation and Development (Source: Company Reports)

Financial Highlights: The company for FY18 reported a 330% growth in total net revenues to $ 16.97 Mn over the prior year. However, a loss for the Group after tax attributable to members increased by 1176.9% and amounted to $ 64.59 Mn in FY 18 over the prior year. It was mainly impacted by the rise in goodwill impairment related to the acquisition of Nulac Foods Pty Ltd, high costs associated with developing products suitable for direct importation into China, provisions to meet China’s regulatory requirements, establishing an office and cross-functional team in Shanghai, contingent consideration of $13.4 Mn payable to the NuLac Foods Vendors for future satisfaction of certain performance targets, and high employee costs given one of the KPIs relates to the continued employment of Nulac Foods Vendors. In addition, $2.54 Mn of share-based payment expense relating to options was granted to the CEO. The net assets of the consolidated group have increased by $7.52 Mn from 30 June 2017 to $72.44 Mn as at 30 June 2018. This increase was mainly due to proceeds from the issuance of shares. As of 30 June 2018, the company has a decent cash position i.e., $38.6 Mn with virtual debt-free status. The current ratio stood at 4.35x in FY18, representing adequate liquidity to fulfill any shortcoming liability in near future. No dividends were proposed or paid during the period.

 
FY18 – Consolidated Profit and Loss Statement (Source: Company Reports)

Highly Experienced Team: Executive team at Bubs has an extensive experience in the infant food industry to implement the new development strategies and growth plans for the business. Currently, the group is headed by Ms. Kristy-Lee Newland Carr – Founder, CEO & Executive Director. She has a soundtrack record to work in numerous international FMCG food and children’s brands, including 5 years managing a high-profile account in Hong Kong and has a proven track record of leading and building successful brands and businesses over the past 20 years. Hence, we believe that she will continue to lead a talented team and provide guidance to employees and grow the business in relation to make Bubs as a successful brand across the globe.


Highly experienced management team (Source: Company Reports)

Positive Outlook: We are optimistic on the company at the back of healthy balance sheet, securing strategic partnerships, increasing brand value in all the key geographic areas. Moreover, the company will continue to pursue its business strategy and essential investment in channel capacity, including several new key trading partnerships servicing offline and online platforms, which will rapidly advance its China expansion strategy. Having secured a brand nomination with a Chinese registered manufacturing facility, the group is now well advanced in pursuing its application approval with the responsible regulatory agency. Further, the Company is confident that the past investment in its brand has established a strong consumer franchise which will continue to strengthen as its level of investment and distribution continue to grow. The Company considers that it is uniquely positioned and will be benefitted from the expansion of the category over the time as it has a comprehensive suite of intellectual property which includes patents, trade-marks, proprietary processes and know-how. 

Other Key Updates: The group has recently informed the market that its current CEO, Mr. Nicholas Simms will continue his services until October 2018, when the contract ends, during which time he will be helping effect an orderly transition to Bubs Australia’s Founder and Managing Director, Ms. Kristy Carr, who is stepping into the role Chief Executive Officer (CEO). Besides this, the company has listed in the ASX Top 500 All Ordinaries Index.

Stock Performance and Analysis: The company seems to be poised for exponential growth in the forthcoming years supported by balance sheet position, the pipeline of core assets, secured strategic partnerships and licensing agreements, and capital market support and exposure. From technical standpoint, the stock has surged 8.73% over past one month and has moved above its support level of $0.6743 after spending some time in consolidating. The price movement does not show any significant structural weakness as such and we believe that the stock price is poised to move higher from the current levels. Also, at current levels, the risk-reward ratio is favorable for the investors since the stock is hovering around its support level and has significant room for upside. From the valuation standpoint, the price to book ratio is around 2.83x for the last twelve months and is expected to be around 4.64x in the next twelve months which is below the industry median of about 9.89x. The lower P/B level indicates that the stock is found to be within an undervalued zone. Another parameter on valuation side indicates that the EV to Sales ratio came in at 48.24x for the last twelve months and we expect an improvement to single digit in the next twelve months which can fall in-line with the industry median of (6.08x). It indicates that the company is on track to improve its topline growth relative to its enterprise value in the upcoming period. Moreover, BUB is also making efforts to improve its ROE. Given the backdrop of aforesaid facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of $ 0.670, as the company is still in the developing stage and continues to invest heavily in building its distribution capability and brand awareness.


 
BUB Daily Chart (Source: Thomson Reuters)
 

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